Should a lease agreement have a clause for liquidated damages to protect the landlord if a tenant defaults on his lease?
In general a liquidated damages provision in a contract is used to specify a predetermined amount of money that must be paid as damages when one party to the contract breaches the contract (fails to perform to contract terms and conditions). Boiler-plate language to that effect can be found in generic, pre-printed lease forms provided by various sources.
A liquidated damages clause in a lease agreement has been used to provide the landlord with a preset amount as termination fees in the event of a tenant’s early departure or as a penalty when a tenant holds over in his lease. However the use of such a lease clause is not recommended in a landlord-tenant agreement. An amount specified as liquidated damages is set as an amount that is the best estimate at the time of the contact what the damages might be if there were to be a contract default. In the case of the landlord-tenant relationship, the amount set as liquidated damages might be a higher amount than the actual damage a landlord might suffer from a tenant default. The higher damage amount, unless very close to the actual damage amount, could likely be viewed by the court as a penalty and judged illegal. In many states the use of liquidated damages is prohibited by law. When a tenant moves out before his lease expires, in some states the tenant is legally responsible only for the actual losses that his early departure caused the landlord, such as the amount of rent the landlord lost. If a replacement tenant is found within a short time after the original tenant moved out, the landlord in some cases may not have incurred a significant loss in rents. The amount of liquidated damages may exceed the landlord’s expense in re-renting the unit. In some states the landlord is held responsible by law to mitigate loss, that is, to make reasonable effort to re-rent the unit in order to minimize the loss.
Some landlords have used a lease clause that made holdover tenants pay a higher rent in an attempt to prevent tenants from staying past the end of their lease term. This could be perceived as a form of liquidated damages since the landlord in effect penalized the tenant for the holdover. As well as being prohibited by liquidated damages laws in some states, such an action could be in violation of consumer protection rights.